Intermediation the key challenge for Micro Insurance. Jeremy Leach FinMark Trust. With support from:

Transcription

1 Intermediation the key challenge for Micro Insurance Jeremy Leach FinMark Trust With support from:

2 Independent trust formed in April 2002 Initial funding from the UK s Department for International Development (DFID) Mission: Making Financial Markets Work for the Poor in Africa Facilitating and catalysing the next generation of development around access to financial services. Member of the CGAP Working Group on Micro Insurance Further information available at: FinMark Trust

3 Contents Demand side Insurance value chain [Regulatory context on CD only] Emerging intermediary typology Conclusions

4 Demand Side

5 ZAMBIA UGANDA TANZANIA KENYA BOTSWANA NAMIBIA SA ALL 0% 20% 40% 60% 80% 100% Banked Formal other Only Informal Excluded Access strands in Africa

6 Insurance Landscape of access Transactions Savings Relatively high usage of savings products, in line with CGAP review of microfinance in Africa (2005) Credit ALL Southern Africa East Africa % using at least one product in each category Note: credit likely undercounted; and transactions includes sending remittances Landscapes of access compared

7 33.2% (6.5m) has any funeral cover 2.2% (428,000) has any life (excl. funeral) cover formal cover: 48% (3.1m) has a form of formal funeral cover informal cover: 52% (3.4m) has burial society membership only 57% (1.8m) has cover through a funeral parlour/undertaker Salient features of MI market: Dominance of funeral insurance Large informal market Large illegal market Low income models mostly tick box LSM 1 5 (19.7m) 0.04% (8,000) has credit life insurance (1.6% has retail hire purchase account) 0.5% (98,000) has general insurance (short term) Drivers of development: Specific regulation (e.g. FAIS) Regulatory absence and forbearance Regulatory concessions Regulatory pressure on inclusion New models and technology (e.g. mobile phones) Demand for insured service Compulsion Source: Genesis, FinScope SA market context: Current MI market LSM 1 5 (poorest 60% of the population)

8 8.8 m Household Household heads heads (LSM (LSM 1 1 5) 5) Currently Currently have/use have/use product product 8.1m Currently Currently do do not not have/use have/use product product 5.3m Does Does not not have have access access to to the the product product Too poor (defined Too poor (defined as <R5/day per as <R5/day per capita) capita) Affordability Affordability (Monthly HH income (Monthly HH income of less than R500) of less than R500) Too Too old old or or too too young young Income Income is is irregular irregular (HH (HH Awareness (don t Awareness (don t understand burial understand burial society ) society ) 1.56m m 1.5m 1.6m Market redistribution zone 4.4m Market development zone Cannot Cannot make make payments payments 2,15m Has Has access access to to the the product product but but does does not not use use it it Don t Don t want want the the product product Potential Users Potential Users m 2.09m Market enablement zone Based on a paper entitled The Access Frontier as an Approach and Tool in Making Markets Work for the Poor by David Porteous South Africa: The Access Frontier for Funeral Insurance

9 Current market Market enablement zone Market development zone Market redistribution zone Zambia 2% 14% 65% 19% SA 24% 15% 3% 34% 24% Botswana 25% 10% 2% 57% 6% Namibia 33% 8% 3% 44% 13% Insured Have access but don t use Don't want Not too poor but cannot access Too poor Funeral insurance access frontiers for selected African countries

10 % Using mobile phones for: % total KENYA TANZANIA Use of airtime for cash % who have transferred airtime Note: question only asked in these two countries so far New technology offers the opportunity to transform collection systems

11 Insurance Value Chain

12 Mutual or stock Internal or outsourced Brokers, agents, bank/retailassura nce, direct etc Marketing, sales, policy administration, claims payment, servicing by third parties Distribution channel Risk carrier Administration Intermediation Customer Technology Policy origination, premium collection, policy administration Cash or bank or e money Social or IT Source: Genesis (2007) Insurance value chain: all about efficiency

13 [Regulatory Context]

14 Financial inclusion policy/regulation Prudential Type of insurers Product types Market conduct Intermediary types & qualifications Advice or non advice Bundling or choice Compulsory or voluntary Institutional and corporate governance regulation Other: Tax/AML CFT/Infrastructure/E money Source: Genesis (2007) Outline of regulatory objectives: a basic model

15 Compulsory Voluntary Embedded in sales of credit product Pay for service (capital and indemnity basis) Replaced earning asset or income, settle debt Credit life Funeral insurance Legal insurance Life insurance Personal accident Mobile phone insurance Formal insurance not the point of entry for low income consumers All MI products written on shortterm basis (<12 months) New models allow for cash premiums and premium collection through non bank channels (e.g. Retailers and cell phones) New models rely on passive sales Decreasing take up Increased sales effort and cost of claims assessment Increasing sensitivity to transaction based regulatory costs Replace non earning asset House/shelter structure Household content Source: Genesis (2007) Product drivers and dynamics: risk is product baseed

16 Emerging intermediary typology

17 Intermediary typology Nature of intermediary Nature of intermediation process Nature of product Captive/ independent Relationship with one or many insurers Control over access to clients Product ownership/innovation Private benefit/member benefit Multi function/sole financial function Advice/disclosure/tick box Passive/active Face to face/telephone/internet Compulsory/voluntary Standalone/bundled/embedded Accept cash premiums Complex/commoditised product Independence of advice Ability to introduce new models Client driven product development Ability to ensure consumer protection Governance (for profit) Lower cost distribution Is advice necessary and should this be regulated? Does regulatory environment facilitate low cost, but active sales process? Does regulation allow new distribution models? Do models allow extension beyond compulsory sales Can consumer protection be ensured with compulsory and embedded sales? Can simplification compensate for absence of advice Can CAT standards reduce need to regulate advice?

18 I) BROKERS Emerging types of intermediaries Insurer 1 Insurer 2 Broker Insurance Client Examples: Traditional broker / Emerging broker Shared brokerage Networked brokers Examples: II) TIED AGENTS One insurer Agent Insurance Client Traditional agent or franchised agency, e.g. Liberty Life Tiered agency force Banking services Examples: (a) Independent III) MULTI FUNCTION INTERMEDIARIES Insurer 1 Insurer 2 Insurance Intermediary Retail products Banking services Client Retailers, e.g. Shoprite Banks, e.g. Standard Bank Independent funeral parlours Examples: (b) Tied One insurer Intermediary Insurance Client Retailers, e.g. Pep/Hollard and Edcon/Hollard Tied funeral parlours Retail products Banks & MFIs, e.g. Wizzit Bank IV) LOW INCOME GROUPS One insurer Savings Credit Insurance Administration Lowincome group Client Client Client Examples: Burial societies/rosca/ascas, Apex bodies, e.g. SACCOL Unions

19 Challenges & risks: Commission structures due to small size of policies. Insurer 1 Potential for regulatory whiplash risk due to lack I) of BROKERS advice. Lack of brand and awareness / education in Insurer 2 low income market. Broker Insurance Opportunity: Reduces costs Enables employment opportunities. Uses social capital of runners Client Example 1: SANTAM (South Africa) broker with runners Recent variation on broker model Sell new low income household structure and content insurance Brokers employ runners who sell the product but not registered to provide advice Advice provided by broker or supervisor. Supervisor for every 5 runners. Premiums collected by debit order. No option to pay premium in cash. Free Call me for SMS used for call centre access

20 The model: Global broker cum administrator dedicated to working with microfinance players to develop and administer micro insurance policies. End of 2006, MIA had more than policies which covered more than 3 million lives. In Africa they have clients (with dependents). Risks & challenges: (a) Growing consumer activism and consumer protection will prevent compulsory credit life products which has been focus (b) Regulatory constraints entrenches existing providers and allows for brown bag activities. Eg no incentive possible for bancassurance partners in Uganda. (c) Entrants of new insurers with own administrative systems and thirst for BOP market may crowd out OIA in future. (d) Potential for MFIs to develop own insurance capacity. Opportunity : Expertise in product development in this market is limited and growing demand from clients. Ability to offer low cost administration platform is a key comepetitive advantage A hybrid new breed of broker

21 Challenges & Risks Regulatory requirement for cash alternative Complicated and changing regulatory environment as not offering advice Opportunities Leverage off the service involved as persistency higher via the parlour than the agent. II) TIED AGENTS One insurer Agent Insurance Client HTG SA tiered agency force Similar to the broker model Variation on agency model Funeral policies only HTG funeral parlours employing runners who sell policies and collect cash premiums Claims paid via funeral parlours Runners cannot provide advice. Refer to representative in funeral parlour

22 South Africa (a) Independent Insurer 1 Pep/Hollard Launched March 2006 Insurer 2 III) Monthly MULTI FUNCTION renewable funeral, personal accident INTERMEDIARIES and cell phone insurance policies Utilise Pep stores chain for distribution One Purchase starter pack in store. insurer (b) Tied Contact details captured at till. Call centre contact to activate the policy Passive, tick box sales. Questions answered by call centre. Accept cash premiums. Pay out to bank account or via Mzansi money transfer product Renewal reminders via SMS South Africa Intermediary Intermediary Banking services Insurance Retail products Banking services Insurance Retail products Bangladesh Client Client Uganda

23 RETAILER: Pep/Hollard Launched March 2006 Monthly renewable funeral, personal accident and cell phone insurance policies Utilise Pep stores chain for distribution Purchase starter pack in store. Contact details captured at till. Call centre contact to activate the policy Passive, tick box sales. Questions answered by call centre. Accept cash premiums. Pay out to bank account or via Mzansi money transfer product Renewal reminders via SMS AIRTIME AGENTS: Discovery/Smartcall Launched Nov 2006 Monthly renewable funeral policies Utilise airtime distribution network via retailers. Use SMS with phone call on queries, reminders and renewals Registration pack with basic information Passive, tick box sales. Questions answered by call centre Accept cash premiums. Vouchers purchased for premiums. Pay out to bank account or via Mzansi money transfer product to post office Challenges & Risks Lack of awareness / education Lack of persistency Lack of advice on models opens up regulatory risk Poor literacy levels provides a challenge Opportunities Low cost outreach Wide accessibility in remote areas Cash market covered

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25 South Africa La Equidad, Colombia IV) LOW INCOME GROUPS One insurer Savings Credit Insurance Administration Lowincome group Client Client Client

26 Challenges & risks Growing regulatory concern that corporate governance not sufficient mutual nature not sufficient. Lack of capacity and systems Coops typically charge 25 35% admin fee and this is increasing as they realise their bargaining power. Whilst, in theory, low cost, this channel is not cheap. Opportunities Social capital Lower cost infrastructure (often due to informality) and profits should remain members Adaptability to member needs La Equidad (Colombia) A cooperative insurer in Colombia that sells to non members as well. Mostly sell through cooperatives that are part of Confecoop (coops association). Whilst for member benefit, policyholders are not necessarily members.

27 % Trust informal organizations % ALL Southern Africa East Africa Note: Trust informal organizations =% disagreeing with statements like you don t trust informal associations like (local variety of informal savings/credit group) However, trust of informal organisations is not high in Africa and differs greatly by region

28 Conclusions

29 Likely reach to low income market: Traditional, advice based models pushed out of lower income market New models more cost efficient, reaching lower income markets Multi function models particularly cost efficient New voluntary models starting to extend beyond bank reach by allowing cash collection Cell phone technology being utilised to reduce cost and improve persistency Most new models starting to rely on voluntary sales Still limited to funeral insurance or credit life and regulatory constraints: Few models have added non funeral products, but take up not yet demonstrated Broker/agent variations will be interesting to watch as these allow for active selling This may require leniency on commissions and market conduct regulation An enabling environment for intermediaries key. Eg Uganda requires up front payments for insurance unless one is a broker and prohibits commission to non brokers. Reach not equal to take up: However, reach not equal to take up Most of the new models employ passive sales models which is not yet proven to achieve take up (particularly for non funeral insurance) Absence of advice risks mis selling and churn: Due to regulatory cost and risk, new models have avoided advice and verbal disclosure. Regulatory uncertainty on whether space for non advice selling will continue to exist Conclusions

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